U.S. debt—let’s do the numbers

In the midst of the current debt hysteria in the United States, it might be helpful just to look at the numbers.

MSNBC [ht: ja] has compiled some useful information. For example, instead of just going by the scary number on the National Debt Clock, it’s useful to consider the ratio of debt to national income. As it turns out, the United States is seventh (at a ratio of 101 percent), after Japan, Greece, Italy, Iceland, Ireland, and Portugal, just above Belgium, France, and the United Kingdom.

What about the holders of U.S. debt? The bugaboo is, of course, China—which, as it turns out, owns just 8 percent of total U.S. debt.

The rest of the data is interesting: Roughly 28 percent of the $14.3 trillion national debt is sitting in a Treasury Department account called “Social Security.” Another 12 percent is held in hundreds of other government trust funds. Foreign governments (apart from China) together hold about 25 percent of the total. Private investors–from insurance companies to mutual funds–hold the final 28 percent.

Once you do the numbers, the U.S. national debt is just not an issue that should cause hysteria—not in terms of its size (especially in the midst of the Second Great Depression, with millions of unemployed people and plenty of excess capacity) nor in terms of its ownership (apart from the fact that wealthy individuals and large corporations would prefer to lend money and receive interest payments instead of paying their fair share of taxes).

It’s another set of numbers that really should be worrying us—like the unemployment rate, the number of children living in poverty, the income and wealth gaps, the rate of exploitation, and so on. That’s what the pundits and politicians should be concerned about.

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The main problem with the debt is that it may grow exponentially. When the debt is double the current size, and US debt acquires a risk premium making debt service more expensive, then we could get a vicious feed-back effect. Those countries with even greater debt ratios will also face difficulties. and will probably default. The US default would most likely occur during the next great financial crisis.

This simply isn’t so. The US debt does *not* grow exponentially. Do the math. And Japan has a much higher ratio of debt to GDP than the US, and it experiences no problems at all with debt servicing. In fact, getting downgraded by S&P did not increase its borrowing costs at all. The bond vigilantes are a myth. You must be confusing countries which issue their own sovereign currencies, such as the US or Japan, with nations which which have to repay their debts in foreign currencies or the nations of the EU which do not issue their own sovereign currencies.

How could the debt rise exponentially? To have debt someone needs to lend you stuff, so you are saying that the money available to the US is going to rise exponentially at the same time as there is less easy money to lend. Which makes no sense.

The U.S. dollar is just book keeping entries, since it is not backed by anything real and since the Fed is currently printing dollars hand-over-fist. It is true however that if someone refuses to take the dollar in payment, America can send its soldiers over to wipe them off the face of the Earth.

Just as compound interest makes the value of an asset grow exponentially, large deficits funded by ever more borrowing makes a debt (a negative asset) grow exponentially,at first slowly, then ever more rapidly. The country has to borrow ever more money to pay an ever greater debt service. Yes, deficits do imply that others are lending funds. The money being lent to the US government has risen. There is currently easy money to lend, but as the risk premium of US debt rises in the future (several years from now), then the easy money will cease, and higher debt service will compound into even more borrowing. Debt is not just book keeping; the debt service amounts to draining real resources and goods from the economy to pay for past consumption. Japan has no problem now with its debt servicing because of its large domestic savings, but it will have problems as its population ages and even shrinks . The US currently has no problem borrowing; I said the problem is in the future. Of course the US will be able to buy its own debt by creating money. That will reduce the past real debt, but will hurt bond holders and also increase the nominal debt service, so either this will not solve the future deficit problem or else it will result in hyperinflation. If sovereign debt is no problem, why all the fuss about Greece?

America is not Greece. For one thing, all US debt is held in US dollars. Debt, for the most part IS “just bookkeeping”. If we were to issue trillion dollar coins to pay back all the debt held by the US government in one form or another, we’d have no debt problem at all.

And even if debt were an actual problem, austerity is exactly the wrong way to deal with it. Stimulus is the right way, even if it means more borrowing in the short term. Prosperity is the way you pay down debt when you’re the US. Of course, if you’re really concerned about paying for it, you could increase the tax rates on corporations and the wealthy to what they were back in the 40s and 50s…

You’ll never reduce the debt during the on going economic crisis. Yea, yea, I know the resecession is over. Nonsense. The entitlement programs are doing exactly what they were
invented to do in hard times. Times for the US to cut all ties with free trade agreements.
US population comes first. Riegn in the companies that want to operate in the US. Cut
funding, subsidies and tax relief for those who want to invest in overseas operation. Can not have it both ways. US companies should be the priority. Get the large majority of the US
population working. The debt will begin to take care of itself. Start levying taxes and tarriffs
on all countries, no more free rides on the backs of the US population.

http://en.wikipedia.org/wiki/Hyperinflation
If one attempts Keynesian pump-priming during a time of weakness in a fiat currency, the country can easily roll over into a hyperinflationary depression. The above link lists 32 countries where this happened (includes Germany and France). There is always the argument of, “It can’t happen here!” Of course, the next step after that is retreating into the corner and sucking one’s thumb.

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